Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2023 Earnings Presentation
38 slides from Two Harbors Investment's earnings presentation, Jan 30, 2024
Slide 1: An MSR + Agency REIT: Fourth Quarter 2023 Earnings Call
An MSR + Agency REIT Fourth Quarter 2023 Earnings Call JANUARY 30, 2024
Slide 2: Safe Harbor Statement
Safe Harbor Statement FORWARD-LOOKING STATEMENTS This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and,
Slide 3: Financials Overview
Financials Overview Book Value Common Stock Economic Return Comprehensive per Share Dividend on Book Value(1) Income $15.21 $0.45 2.0% $0.40 Income Excluding Market-Driven Investment Quarter-End Economic Value Changes (IXM)(2) Portfolio(3) Debt-to-Equity(4) $0.39 $14.6b 6.0x Note: Financial data thr
Slide 4: Markets Overview
Markets Overview • Driven by a strong September jobs report and labor market statistics, rates peaked in October with the 10-year Treasury briefly hitting 5% and mortgage rates pushing 8% • Positive economic data and dovish comments from the Fed in early November led to rates plunging across the cur
Slide 5: RoundPoint Operations Update
RoundPoint Operations Update • Closed acquisition on September 30, 2023 • Completed 9 of 10 scheduled subservicing transfers of Two Harbors’ MSR to RoundPoint from our subservicing network; 10th scheduled transfer planned for February 1, 2024 • Final “clean up” transfer of loans planned for early Ju
Slide 6: Book Value Summary
Book Value Summary Q4-2023 Q4-2023 Book Value ($ millions, except per share data) Book Value per share Beginning common stockholders’ equity $ 1,477.7 $ 15.36 • Book value of $15.21 per common share, resulting in a 2.0% quarterly Net loss (433.2) economic return on book value(1) Other comprehensive
Slide 7: Results and Return Contributions
Results and Return Contributions Market-Driven Value Changes Other Total and Certain Income Excluding Three Months Ended December 31, 2023 Comprehensive Comprehensive Operating Market-Driven ($ in thousands) GAAP Net Loss Income Income Expenses(1)(2) Value Changes(3) (4) RMBS and other Agency securi
Slide 8: IXM Quarterly Review
IXM Quarterly Review Income Excluding Market-Driven Value Changes(1) ($ in thousands) Q4-2023 Q3-2023 Variance RMBS and other Agency securities (2) • Fourth quarter IXM RMBS and other Agency securities income $ 137,999 $ 145,549 $ (7,550) primarily impacted RMBS and other Agency securities funding e
Slide 9: Strong Balance Sheet and Liquidity Position
Strong Balance Sheet and Liquidity Position BALANCE SHEET AS OF DECEMBER 31, 2023 AGENCY RMBS • $7.7 billion of outstanding repurchase agreements with 18 counterparties • Weighted average days to maturity of 48 days 2019 2020 2021 2022 2023 Average Repo Rate - SOFR (bps) (1) 50 Agency RMBS $8.3 bill
Slide 10: Investment Portfolio Landscape
Investment Portfolio Landscape REALIZED VOLATILITY REMAINS ELEVATED; MSR PROVIDES STABILITY • MBS spreads widened in October as rates rose and realized volatility soared, then tightened in November and December as rates reversed on the Fed’s optimistic assessment of bringing down inflation – Spreads
Slide 11: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE AND RISK POSITIONING At December 31, 2023, $14.6 billion portfolio • Quarter-end economic debt-to-equity decreased slightly to 6.0x from 6.3x(3) Includes $11.4 billion settled positions – Average economic debt-to-equity o
Slide 12: Agency RMBS
Agency RMBS QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Replaced approximately $2.5 billion notional 4.5% and Other, 19.3% 6.5% TBAs with an equal amount of 2.5-4% TBAs, to take advantage of the sharp cheapening of lower 6.0 coupons that occurred in October 5.5 5 Investor, 5.5% 4. 2. Loan
Slide 13: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • Settled $829.1 million UPB through flow purchases and 12/31/2023 9/30/2023 recapture Fair value ($ millions) $ 3,052 $ 3,213 • Price multiple decreased to 5.6x from 5.8x Price multiple 5.6x 5.8x • Prepay speeds decr
Slide 14: Return Potential and Outlook
Return Potential and Outlook ATTRACTIVE RETURN OPPORTUNITIES FOR UNIQUELY POSITIONED AGENCY RMBS AND MSR PORTFOLIO PORTFOLIO INVESTED PROSPECTIVE MARKET RETURNS MARKET VALUE CAPITAL STATIC MARKET RETURN As of December 31, 2023 ($ millions) ALLOCATED(1) ESTIMATE(2) • Market Presence: Our size allows
Slide 15: Appendix
Appendix 15
Slide 16: Effective Coupon Positioning
Effective Coupon Positioning TBA Market TBA Specified Pools MSR/Agency IO Coupon (%) Price(1) Notional ($m) Par Value ($m)(2) UPB ($m)(3) Combined ($m) 2.5% $ 85.23 $ 825 $ 421 $ — $ 1,246 3.0% $ 88.58 975 238 — 1,213 3.5% $ 91.86 751 126 — 877 4.0% $ 94.67 250 503 — 753 4.5% $ 97.05 (697) 2,331 — 1
Slide 17: Risk Positioning
Risk Positioning BOOK VALUE EXPOSURE TO CHANGES IN RATES % Change in Common Book Value 2-Year Rate 10-Year Rate Agency P&I MSR/Agency IO (basis points) (basis points) RMBS/TBA RMBS(1) Other(2) Combined (3) -25 0 Bull Steepener 2.2 % 1.4 % (3.0)% 0.6 % (4) 0 -25 Bull Flattener 7.5 % (3.9)% (4.5)% (0.
Slide 18: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) $300 20% $160.2 11.6% $150 10% $31.5 $38.9 2.2% 2.0% $0 0% $(63.2) $(56.8) (3.6)% (3.5)% $-150 -10% $-300 -20% Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Comprehensive In
Slide 19: Comparison of GAAP and non-GAAP Measures
Comparison of GAAP and non-GAAP Measures Earnings Available Income Excluding Comprehensive for Distribution Market-Driven Value ($ in thousands) Income (EAD)(1) Changes (IXM)(2) RMBS and other Agency securities(3) Coupon income $ 107,368 $ 107,368 $ 107,368 Amortization (4,024) (4,024) (4,024) (4) R
Slide 20: GAAP to IXM Reconciliation
GAAP to IXM Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended ($ thousands, except for per common share data) December 31, 2023 September 30, 2023 Comprehensive income (loss) attributable to common stockholders $ 38,886 $ (56,845) (1) Adjustments to
Slide 21: Earnings Available for Distribution
Earnings Available for Distribution ($ millions, except per share data) Q4-2023 Q3-2023 Variance Interest income $ 122.4 $ 123.6 $ (1.2) • Fourth quarter EAD primarily driven by: Interest expense 168.1 173.1 5.0 – Lower U.S. Treasury futures income due to implied Net interest expense (45.7) (49.5) 3
Slide 22: Q4-2023 Portfolio Yields and Financing Costs
Q4-2023 Portfolio Yields and Financing Costs ($ thousands) Average Portfolio Asset Type Measure Amortized Cost Income(1) Average Yield Available-for-sale securities GAAP $ 8,822,467 $ 103,250 4.68% Adjustments to include other portfolio items: Mortgage servicing rights(2)(3) Non-GAAP 1,956,958 57,98
Slide 23: GAAP to EAD Reconciliation
GAAP to EAD Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended ($ thousands, except for per common share data) December 31, 2023 September 30, 2023 Comprehensive income (loss) attributable to common stockholders $ 38,886 $ (56,845) Adjustment for othe
Slide 24: Agency RMBS Portfolio
Agency RMBS Portfolio Amortized Weighted Par Value Market Value Weighted % Prepay Cost Basis Gross Weighted Average Age ($ millions) ($ millions) Average CPR(1) Protected(2) ($ millions) Average Coupon (Months) 30-Year Fixed ≤ 2.5% $ 421 $ 360 3.6 % —% $ 359 3.3 % 30 3.0% 238 212 2.6 % 85.4 % 211 3.
Slide 25: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Unpaid Principal Current Loan Number of Balance Gross Coupon Size Loan Age 60+ Day Net Servicing Loans ($ millions) Rate ($ thousands) (months) Original FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps) 30-Year Fixed < 3.25% 300,020 $ 94,895 2.8% $ 374 3
Slide 26: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q4-2023 Q3-2023 Q2-2023 Q1-2023 Q4-2022 UPB at beginning of period $ 218,662 $ 222,622 $ 212,445 $ 204,877 $ 206,614 Bulk purchases of mortgage servicing rights — — 14,234 10,713 — Flow purchases of mortgage servicing rights 829 472 539 669 2,678
Slide 27: Financing
Financing $ millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements Facilities Term Notes Payable Convertible Notes Borrowings Percent (%) Within 30 days $ 2,833.2 $ — $ — $ — $ 2,833.2 28.6 % 30 to 59 days 1,918.8 — — — 1,918.8 19.4 % 60 to 89 days
Slide 28: Futures
Futures Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures - 2 year $ (549.6) $ — 88 U.S. Treasury futures - 5 year (1,876.7) — 88 U.S. Treasury futures - 10 year (983.3) — 79 U.S. Treasury futures - 20 year (388.2) — 79 SOFR futures
Slide 29: Interest Rate Swaps and Swaptions
Interest Rate Swaps and Swaptions INTEREST RATE SWAPS Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Payers 2024 $ — —% —% — 2025 4.8 4.741 % 5.380 % 1.2 2026 2.0 4.087 % 5.380 % 2.0 2027 — —% —% — 2028 and Thereafter 5.3 3.748 % 5.380 % 7.8 $ 1
Slide 30: Tax Characterization of Dividends in 2023
Tax Characterization of Dividends in 2023 FULL YEAR 2023 DISTRIBUTIONS SUMMARY • Generated REIT taxable income, before dividend distributions and net operating loss deductions, of $296.8 million • Utilized net operating loss carryover of $51.5 million • 2023 distributions for tax purposes totaled $2
Slide 31: End Notes
End Notes PAGE 3 - Financials Overview 1. Economic return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by book value as of the beginning of the period. 2. Income Ex
Slide 32: End Notes (continued)
End Notes (continued) PAGE 8 - IXM Quarterly Review 1. Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 2. RMBS and other Agency securities includes inverse in
Slide 33: End Notes (continued)
End Notes (continued) PAGE 13 - Mortgage Servicing Rights 1. MSR portfolio based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases. Portfolio metrics, other than fair value and UPB, represent averages weighted by UPB. 2. FICO represents a m
Slide 34: End Notes (continued)
End Notes (continued) PAGE 18 - Financial Performance 1. Economic return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the p
Slide 35: End Notes (continued)
End Notes (continued) PAGE 20 - GAAP to IXM Reconciliation 1. The market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA represents unexpected price changes for the referenced period. As defined, the calculation of IXM includes modeled pr
Slide 36: End Notes (continued)
End Notes (continued) PAGE 22 - Portfolio Yields and Financing Costs 1. Includes interest income, net of premium amortization/discount accretion, on Agency and non-Agency investment securities, servicing income, net of estimated amortization and servicing expenses, on MSR, and the implied asset yiel
Slide 37: End Notes (continued)
End Notes (continued) PAGE 24 - Agency RMBS Portfolio 1. Weighted average actual one-month CPR released at the beginning of the following month based on RMBS held as of the preceding month-end. 2. Determination of the percentage of prepay protected 30-year fixed Agency RMBS includes securities with
Slide 38: Two Harbors Investment Corp.
Two Harbors Investment — Q4 2023 Earnings Presentation on 6ix